THAILAND Sector Note 6 MARCH 2013 Sector Outlook c Sector Weighting Neutral
Thailand Construction Sector Selective BUYs
Sector Valuation Current Target Norm EPS grw ⎯ Norm PE ⎯ ⎯ P/BV ⎯ ⎯ Div yield ⎯ BBG Price Price 2013F 2014F 2013F 2014F 2013F 2014F 2013F 2014F Company Code Rec. (Bt) (Bt) (%) (%) (x) (x) (x) (x) (%) (%) Ch. Karnchang CK TB SELL 27.25 20.00 300.7 166.4 193.8 72.7 3.6 3.7 1.7 0.6 Sino-Thai Eng. STEC TB BUY 35.00 42.00 15.0 20.2 31.0 25.8 5.6 4.9 1.3 1.6 Toyo-Thai Corp TTCL TB BUY 37.75 51.00 58.2 30.3 20.9 16.1 7.2 5.8 2.4 3.1 Source: Thanachart estimates Note: Prices as of close on 4 March 2013; TP for STEC is before the stock dividend We are optimistic on the government’s Bt2tr infrastructure bill. Contractors’ top lines should benefit but we don’t expect all to avoid a margin squeeze given rising building material costs. We see STEC and TTCL as the best cost managers with net cash positions but TTCL is our top pick as we view its valuation as more enticing.
Neutral sector weighting
We maintain our Neutral stance on the Thai contractor sector. Despite SAKSID PHADTHANANARAK the government’s massive infrastructure bill, we expect contractors to 662 – 617 4900 suffer from: 1) rising building material prices as the government is [email protected]
imposing anti-dumping duties on steel imports from China; and 2) the minimum wage hike and a labor shortage. Moreover, the sector has Infrastructure Investment Plan already outperformed the SET by 155% since early 2012 with PE (US$ m) multiples now at very high levels of 42x for 2013F and 31x for 2014F. 12,000 10,000 8,000 Optimistic outlook for construction 6,000 4,000 The government is now moving ahead with a Bt2tr (US$66bn) 2,000 0 infrastructure bill. The bill, which we see as likely to pass parliament by mid-2013, would allow the government to raise funds in addition to the Thanachart Securities annual budget over the next seven years. Some 97% of the budget is Source: OTP, Report on Investment Plan for targeted at rail and road transport investments. Potential projects in the Transport Sector (Year 2013-2020), pipeline in 2012-16 include Bt481bn for high-speed trains, Bt298bn for double-track railways, Bt321bn for mass transit systems, and Bt369bn for Contractor PEG Is Not Cheap roads, highways and motorways. This investment plan is on top of the (x) 2013F 2014F Bt350bn flood prevention scheme for which the government has just 3.0 2.5 announced six qualified contractors to bid for projects. 2.0 1.5 1.0 Rising construction costs 0.5 0.0 While we are less concerned over top-line growth, we still see contractors as exposed to a margin squeeze risk due to a rising proportion of low- Thanachart Securities margin government work. Moreover, we see construction costs increasing due to the minimum wage hike, labor shortage and sustained Source: Thanachart estimates high energy costs. Moreover, we expect the government to levy anti-
dumping duties on steel sheet imports from China this year, which we estimate will push domestic steel prices up by 10-15%. Raw material and ROE Comparison
labor expenses account for around 65% of contractors’ total costs. (%) CK STEC TTCL 50 40 Our top pick is TTCL 30 20 As government projects have very low margins at 5-8%, marginal cost 10 0 overruns could turn contractors’ earnings into losses. We therefore prefer (10) contractors with effective cost controls, net cash positions and good- quality backlogs. We believe these characteristics match STEC, a pure domestic play which we believe has the strongest financial status and Source: Company data best cost management. TTCL is the best play for the Asean Economic Community (AEC) growth market in our view as it focuses on high-margin engineering work without risky civil work. We believe TTCL’s investments in power plant projects would also allow it to secure future growth. However, our top pick is TTCL as we see its valuation as more enticing.
Please see the important notice on the back page
CONTENTS SAKSID PHADTHANANARAK
Contents Page
Neutral on construction sector …..……………………………………………………………………………….……...…………….. 2
Why does the sector trade at very high PE? …..…………………………………………………….…………..…..…………….… 3
Optimistic on future construction outlook …..………….………………………………………….……………..………………..… 4
Upcoming new infrastructure cycle …………………………………………..……………………………………..……………. 4
Where does the funding come from? ………………………………………..……………………………………..……………. 5
No need for all, only some is enough …………………………………………………………………………………………..… 7
The bigger the pie, the larger the slices for all ………………………………….………………………………………………. 9
Project bids lining up in 2013-14 ……………………………………………………………..……………………….…………. 10
Rising construction costs …..…………………………………………………….………………………………..………………..… 11
Further minimum wage hike by 22% in 2013 ……………………………………………..…………………………………… 11
Rising building material prices ………………………………………………………………………………………..…………. 12
Our top pick is TTCL…………………………...…..………………………………….……………………………..………………..… 14
STEC: Best local infrastructure play …………………………………………………………...…………..…………………… 14
TTCL: Top AEC growth play …………………………………………………………………...……………………..…………. 16
CK: Turnaround seems in the price …………………………………………………………………………………….………. 17
Sector Valuation Comparison …..………………………………………………………………………………………..…………… 19
Appendix …………………………………..…………………………………………………………….……………………………….. 20
Company Notes…..……………………………………………………………………………………..……………………………...…….
Ch. Karnchang (CK TB) — Turnaround seems in the price ...………………………….…………………………………… 21
Sino-Thai Eng & Constr (STEC TB) — Best local infrastructure play ………...………………………….………………… 28
Toyo-Thai Corp (TTCL TB) — Top AEC growth play………...………………………….…………………….……………… 35
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SECTOR NOTE SAKSID PHADTHANANARAK
Neutral on construction sector
We have a Neutral The Thai contractor sector has performed very well since early 2012, surging by 192% and weighting on the outperforming the Stock Exchange of Thailand (SET) Index by 155%. We believe that construction sector … investor optimism toward the sector has incorporated expectations that the government's massive Bt2tr (US$66bn) infrastructure bill will be passed by parliament. We share the view that if the new law passes it would help kick-start a new infrastructure cycle in Thailand. However, we have a Neutral weighting on the sector for four key reasons:
… as we believe It’s too First, while share price performances to a certain degree have in our opinion reflected the optimistic to assume the optimism above, we see the full implementation of the seven-year investment plan as infrastructure bill is fully having a lot of risks attached. Therefore, we believe it would be too sanguine to assume the implemented … bill is fully implemented.
…we don’t expect the Second, assuming the bill passes the House in mid-2013 and there are some project bids investments to actually during 2H13, we don’t see serious money or revenue coming this year. We base this come in this year… assessment on construction normally not starting in a big way until six to nine months after bidding results are released.
…and we don’t see every Third, we are confident about contractors’ strong top-line growth but we don’t believe all of contractor enjoying them will enjoy higher profits as construction costs are also on a rising trend due to the higher profits … minimum wage hike, a labor shortage and higher building material prices.
… the sector trades at a Fourth, even though the sector has tended to trade in the past at high PE, it is already near very high PE the peak range during the great bubble period in the mid-1990s, when Thailand was enjoying the peak of its infrastructure cycle. The sector's current PE multiples are now at very high levels of 42x for 2013F and 31x for 2014F versus its historical range of 15-25x.
Ex 1: Contractor Sector’s PE Band Chart Ex 2: CK’s PE Band Chart
(Bt/share) (Bt bn) 300x 200 65x 120 250x 150 55x 100 45x 200x 100 35x 80 25x 50 150x 15x 60 100x 0 40 50x (50) 20
(100) 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 2013F 2014F 2015F Sources: Company data, Thanachart estimates Sources: Company data, Thanachart estimates
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SECTOR NOTE SAKSID PHADTHANANARAK
Ex 3: STEC’s PE Band Chart Ex 4: TTCL’s PE Band Chart
(Bt/share) (Bt/share) 70 140 39x 60 120 42x 32x 50 100 35x 25x 40 80 28x 18x 30 60 11x 21x 20 40 14x 10 4x 20 7x 0 0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2010 2011 2012 2013F 2014F 2015F 2013F 2014F 2015F Sources: Company data, Thanachart estimates Sources: Company data, Thanachart estimates
Why does the sector trade at very high PE?
The contractor sector has Being a contractor is a risky business, in our view. We see it as synonymous with low profit tended to trade at high margins despite the high risk from often inconsistent work volumes, building material price PE multiples in the past volatility, labor shortages, disputes about projects, and late payments by project owners. because … These risks can also cause contractors’ earnings visibility to be opaque. Even so, the sector is still trading at very high PE multiples and we believe this is because:
… 1) the construction First, the construction cycle is very lengthy, and this would especially be the case if cycle is lengthy … Thailand’s multi-year infrastructure investment cycle gets going.
…2) contractors’ backlog Second, contractors’ top-line growth can be predicted based on their backlog values and value can guarantee their many Thai contractors have been reporting record-high backlog values. top-line growth However, given the risks mentioned above, we do not expect every contractor to be able to deliver top-line growth to their bottom lines. We therefore prefer contractors with effective Our top pick is TTCL cost controls, low gearing or net cash positions and good-quality backlogs. We believe these characteristics match Sino-Thai Engineering & Construction (STEC TB) and Toyo- Thai Engineering (TTCL TB). However, our top pick is TTCL as we view its valuation as more attractive. Please see more details on these two firms in the last section of this report and in the individual company notes.
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SECTOR NOTE SAKSID PHADTHANANARAK
Ex 5: Contractor Sector Valuation Comparison
EPS growth —— PE —— — P/BV — EV/EBITDA — Div yield — Name BBG Code Country 13F 14F 13F 14F 13F 14F 13F 14F 13F 14F (%) (%) (x) (x) (x) (x) (x) (x) (%) (%) Man Infraconstr. MINF IN India 60.3 21.7 11.0 9.1 0.3 0.3 7.8 6.8 1.7 1.9 Simplex Infra. SINF IN India na 52.9 10.9 7.2 0.6 0.5 5.2 4.5 1.4 1.5
Gamuda GAM MK Malaysia na11.3 13.9 12.5 1.9 1.7 14.7 13.0 3.2 3.4 IJM Corp IJM MK Malaysia na 18.7 14.7 12.4 1.2 1.2 10.4 9.1 2.4 2.6
Daewoo Eng. 047040 KS South Korea na 40.4 8.0 5.7 0.7 0.6 7.6 6.5 0.2 0.3 Hyundai Eng. 000720 KS South Korea 37.3 19.7 11.1 9.3 1.0 0.9 10.5 9.0 1.2 1.5 Samsung Eng. 028050 KS South Korea 51.0 30.6 12.7 9.7 1.4 1.3 8.6 7.4 1.0 1.1
Sriracha Construction SRICHA TB Thailand 6.8 21.1 16.5 13.7 6.4 5.3 12.7 10.5 4.1 4.5 Italian-Thai Devel. ITD TB Thailand 494.7 37.2 61.9 45.2 3.5 3.4 12.1 11.6 0.2 0.4 Seafco SEAFCO TB Thailand 3.9na 12.8 na 2.7 na 8.2 na 3.1 na Syntec Construction SYNTEC TB Thailand (218.4) 26.2 15.9 12.6 1.1 1.1 9.4 9.2 2.1 3.0 Nawarat Patanakarn NWR TB Thailand (60.5) 5.9 17.1 16.1 2.1 2.0 7.6 7.1 3.1 3.8 CH Karnchang * CK TB Thailand 300.7 166.4 193.8 72.7 3.6 3.7 40.4 40.5 1.7 0.6 Sino Thai* STEC TB Thailand 15.0 20.2 31.0 25.8 5.6 4.9 22.8 18.6 1.3 1.6 Toyo-Thai Corp* TTCL TB Thailand 58.2 30.3 20.9 16.1 7.2 5.8 17.0 13.0 2.4 3.1
Average 66.6 35.4 29.0 18.5 2.5 2.2 12.8 11.6 1.9 2.1 Source: Bloomberg Note: * Thanachart estimates using normalized EPS growth Based on 4 March 2013 closing prices
Optimistic on future construction outlook
Upcoming new infrastructure cycle
Thailand’s public The last massive-scale infrastructure boom in Thailand was in the 1990s before the investment has been country's financial bubble burst in 1997. Then came a period of mass transit investments declining since the under the Thai Khem Kaeng (Strong Thailand) infrastructure stimulus package when financial crisis in 1997 Thailand began building many mass transit lines, including the Red, Purple, Blue and Green extensions, during 2009-11. However, despite the construction of some of those projects still continuing and generating revenues for contractors, the stimulus package which was launched via an executive decree lasted only three years and has now ended.
The potential new Now, with a potential new infrastructure bill that we expect to become law in mid-2013, we infrastructure bill which believe Thailand is about to enter a new infrastructure cycle and the government’s hope is we expect to become law that this bill will last seven years. Why does Thailand need to have an infrastructure bill that in mid-2013 would kick- needs parliamentary approval to make it into law? Why can't the government just go ahead start the investment cycle with its infrastructure investments under the normal channel of government budget again spending? First, the yearly budget isn’t enough to finance these huge investments as there is a budget law limiting how much the government budget deficit can be. Second, the government has a very big burden from its populist projects and politically, we believe that these take priority for it over infrastructure spending. The passing of the infrastructure bill would unlock the government's financing capacity, in our view.
On top of the bill, there is On top of the infrastructure bill is the delayed spending of the Bt350bn executive decree to also the Bt350bn fund flood prevention-related projects. The government is speeding up the bidding process executive decree to be completed before the decree expires at the end of June 2013.
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SECTOR NOTE SAKSID PHADTHANANARAK
Ex 6: Government Spending And Investment: Plan And Progress Update
2011 ——— 2012 ——— ——— 2013 ——— ——— 2014 ——— Calendar year 2015-19 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q FY13 budget disbursement Total budget Bt2.4tr disbursed 3m = Bt785.9bn
FY14 budget Bt2.525tr
Bt350bn Emergency decree for Total amount (of which Bt300bn is in the process water management of Terms of Disbursement Reference (TOR)* submission)
borrowed Bt3.67bn or 1.05% (as of Jan 2013) Infrastructure investment* Total amount Bt2.0tr Sources: Ministry of Finance, Office of the National Economic and Social Development Board, KASIKORNBANK
Where does the funding come from?
We expect the Implementation of the government’s plans has been one of the market’s major concerns. government’s plan to be However, we believe this concern has been eased given the following reasons: implemented given … First, Thailand’s political situation has been settling down with a continued improvement in … 1) the current political stability. Under Prime Minister Yingluck Shinawatra’s government, the Pheu Thai (PT) stability … coalition controls 296 votes in the 500-seat parliament, a comfortable majority, while its populist policies such as the minimum wage hike, first-car and first-house schemes and rice pledging policy not only favor grassroots people but also middle-income groups. We actually expect a good number of defections from the opposition camp, the Bhumjaithai Party, 34 MP seats, to PT.
… 2) huge net fund Second, the huge US$31bn (8% of GDP) in net fund inflows into Thailand in 2012, which inflows which we believe we expect to continue to have some effect into this year, have created more liquidity in the will help finance the system. We believe more liquidity would indirectly help finance infrastructure investments investments … under the government’s Bt2tr infrastructure bill, with the government able to raise debt more easily and without much of a crowding out effect or upside pressure on interest rates.
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SECTOR NOTE SAKSID PHADTHANANARAK
Ex 7: Net Fund Inflows At Historical High
(US$ m) Net fund inflows 35,000 Bond market Equity market
30,000 QE3 + its recent extension, more 25,000 Japan money 20,000 printing, OMT implementation 15,000
10,000 5,000
0 (5,000) 2009 2010 2011 2012 2013
Sources: SET, Thai Bond Market Association, Thanachart estimates
… 3) we see private Third, with more liquidity, we see private companies being able to raise money more easily companies being able to to finance their investments in the government’s projects. There would also likely be more raise more money to investor demand for the infrastructure fund, in our view. finance the government’s projects
Ex 8: Private Investment
(Bt bn) 3,000 +7.9%
2,500
2,000
1,500
1,000
500
0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F Source: Office of the National Economic and Social Development Board
… 4) the infrastructure Fourth, under the infrastructure bill, public debt would be allowed to rise and the bill allowing a rise in government’s expectation is that its infrastructure investment would not raise public debt public debt above 50% of gross domestic product. According to the plan, 90% of the Bt2tr in investments is to be funded by loans, 7% by public-private partnerships and 3% by income from state-owned enterprises.
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SECTOR NOTE SAKSID PHADTHANANARAK
Ex 9: Public Debt Would Not Exceed 50% Of GDP Ex 10: Sources Of Funds
(% to GDP) 60 PPP Inc ome 7% 55 from SOEs 3% 50
45
40
35 Loans 90% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F Sources: SET, Thai Bond Market Association, Ministry of Finance Source: Public Debt Management Office
No need for all, only some is enough
We don’t expect the Exhibit 11 shows the money the government is planning to spend on infrastructure entire budget to be spent. investments each year during 2013-20. We do not expect all of it to be used up on time. Only half would still be However, if even half is spent, we see this as still large enough for all the contractors. enough
Ex 11: Public Investment Plan Under The Bt2tr Bill
(US$ m) 12,000 11,109 10,871 10,289 10,000
7,761 8,000 6,451 6,109 6,000 5,437
4,000 3,147 3,124
2,000 530 0 2011 2012 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F
Source: Report on Investment Plan for Transport Sector (Year 2013-2020), The Office of Transport and Traffic Policy and Planning
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SECTOR NOTE SAKSID PHADTHANANARAK
Some 97% of the budget About 97% of the Bt2tr budget is destined for rail and road investments. would go on rail and road investments
Ex 12: Investment Plan For The Bt2tr Infrastructure Bill
Water 1% Customs Department 2%
Road 19%
Rail 78%
Source: Ministry Of Transport, Thailand
Combined with the Combined with the government’s fiscal budgets, major investment projects in the pipeline in government’s fiscal 2012-16 include Bt481bn for high-speed trains, Bt298bn for double-track railways, Bt321bn budget, there are also for mass transit systems, and Bt369bn for roads, highways and motorways. Moreover, with planned investments in power plants in particular, there has been increasing concern about possible electricity the energy, telecom and blackouts in the near future due to a series of delays in the construction of independent utilities sectors power producer (IPP) projects despite the concessions being awarded many years ago. At the same time, electricity demand has been stronger than expected as a result of the economic recovery. These worries have prompted the Electricity Generating Authority of Thailand (EGAT) to speed up its existing capacity expansion to cope with higher demand.
Ex 13: Infrastructure Development Plan In 2012-16
Budget (Bt bn) Share Transportation - Inland 1,469.9 65% - Motorways 187.3 - Railways 298.2 - High-speed trains 481.1 - Mass transit 321.3 - Roads/Highways 182.0 Transportation - Air/Sea 148.5 6% Energy 499.5 22% Telecommunication 35.2 2% Utilities 117.1 5% Total 2,270.1 100% Source: Office of the National Economic and Social Development Board
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SECTOR NOTE SAKSID PHADTHANANARAK
Ex 14: Thailand’s Power Development Plan For 2012-30
Source Megawatts Project (no.) Combined cycle (gas) 25,451 25 Cogeneration 6,374 69 Clean coal 4,400 7 Renewable energy 9,516 na Nuclear 2,000 2 Gas turbine 750 3 Imported (hydro) 6,572 10 Total 55,063 Source: National Energy Committee
For the Bt350bn On top of the Bt2tr and fiscal budgets, the government has earmarked spending of Bt350bn executive degree, the for flood prevention projects. The government has already announced seven qualified government has already companies to bid for designing and building the flood prevention projects. Those companies announced the qualified are: bidders and we expect awarded contracts to be 1) Korea Water Resources Corporation (K-water) (Unlisted) announced soon 2) ITD Power China JV, including Italian-Thai Development (ITD TB, Bt6.35, Unrated) 3) Summit SUT Joint Venture (Unlisted) 4) Team Thailand Joint Venture, including Ch. Karnchang (CK TB, Bt25.25, Sell) and Christiani & Nielsen (Thai) (CNT TB, Unrated) 5) China CAMC Engineering (Unlisted) 6) Japan-Thailand Joint Venture (Unlisted) 7) TKC Global (Unlisted)
The government plans to decide by April 2013 which companies will be awarded contracts. Please note that even though other contractors including STEC are not qualified to bid for the projects, they can subcontract for civil work from the qualified contractors, especially the ones which have no local civil contractor partners yet.
The bigger the pie, the larger the slices for all
Such a huge investment We see the huge investment budget benefiting all contractors, especially the big three Thai budget would benefit contractors ITD, CK and STEC which are government-qualified to do any type of civil work. every contractor, in our We also expect smaller contractors to share some gains from large players’ subcontracting view work. We are also less concerned about competition from foreign contractors given that we believe the pie is big enough for new players while local contractors in our view have advantages in accessing cheap building materials and labor, understanding the government’s working processes and dealing with local people. Moreover, we expect foreign contractors to focus on conceptual design and engineering work where we see local contractors having less skill and experience. For an infrastructure project, half of the budget normally tends to be distributed for civil work while the rest is used for procurement and engineering work.
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SECTOR NOTE SAKSID PHADTHANANARAK
Project bids lining up in 2013-14
We expect the bidding Please note that actual benefits to contractors due to these investments would not be seen process to start this year this year as 2013 would be when they put in bids for the projects. After the bidding results but actual investments to are announced, we expect it would take six to nine months for the contract signings with the only be seen in 2014 government and planning and procurement processes before the winning contractors could actually start construction. Exhibit 15 shows the government’s major projects where we expect bids to kick off during 2013-14.
Ex 15: Project Bids Expected In 2013-14
Budget (Bt bn) Mass rapid transit 152.5 - Dark Green Line (Mo Chit – Saphan Mai) 36.5 - Dark Green Line (Saphan Mai – Lum Luk Ka) 11.0 - Pink Line (Khae Rai – Min Buri) 50.0 - Orange Line (Thailand National Culture – Min Buri) 55.0 Double-track railway 53.0 - Double track (Klong 19 – Keang Koy) 11.0 - Double track (Prachuap Khiri Khan – Chumphon) 17.0 - Double track (Thanon Chira – Khon Kaen) 25.0 Power plant projects 29.7 - SPP & Cogeneration projects (expected to COD in 2015-16) 29.7* High-seed trains (4 routes) 413.8 Airport Rail Link (Extension: Phaya Thai – Bang Sue – Don Muang) 30.0 Motorways (2 routes: Bang Yai – Ban Pong – Nam Phu Ron & Bangpa-In – Korat) 101.7 Suvarnabhumi Airport’s Phase 2 expansion 62.5 Flood protection system 350.0 The Parliament House 12.0 Sources: Company data, *Thanachart estimates
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SECTOR NOTE SAKSID PHADTHANANARAK
Rising construction costs
We don’t expect every Given the government’s huge infrastructure investments over the next seven years, we contractor to be able to don’t expect top-line growth to be a concern for every contractor. However, we see each pass top-line growth contractor’s profitability still depending on how efficiently it manages costs. Even though we through to the bottom expect construction costs to rise only moderately, government projects normally have very line as … low gross margins at only 5-8% compared to private projects’ at over 10%. Slight cost overruns, especially for sizable projects, could therefore easily put contractors’ earnings in the red. For civil contractors, around 50% of their total construction costs normally comprise …1) government projects building materials while 35% is labor costs and 15% is equipment and site overhead costs. have very low margins … Half of the building materials costs or around 25% of the total construction costs are for cement and steel.
Ex 16: Contractors’ Cost Structure On Average Ex 17: Material Price Index
Diesel Site overhead costs, 5% Labor & (%) Mixed cement (retail price) Subcontracting 180 Equipment costs, costs Avg. steel price 170 10% 35% 160 150 140 Other building 130 materials costs 120 25% 110 100 90 Cement & Steel 80 costs, 25% Jul-09 Jul-10 Jul-11 Jul-12 Jan-09 Oct-09 Jan-10 Oct-10 Jan-11 Oct-11 Jan-12 Oct-12 Jan-13 Apr-09 Apr-10 Apr-11 Apr-12 Source: Company data Sources: Bank of Thailand, Ministry of Commerce
Further minimum wage hike by 22% in 2013
…2) the minimum wage is The minimum wage in the Thai labor market has traditionally increased at an average of due to continue to rise 2.5% a year. However, given the current government’s policy, starting from 1 April 2012, this year … Thailand’s minimum wage rates surged by 40% from 2011 levels across the country, including in seven high-income provinces such as Bangkok and its vicinity and Phuket where it rose to Bt300/day. Starting from 1 January 2013, the minimum wage was raised again to Bt300/day nationwide, up an average of 22.4% from 2012. However, we see the impact from the hike on large contractor companies as minimal as: 1) they pass on the rising labor costs to project owners by raising bidding prices, 2) most of their workers are skilled laborers and they are paid much more than the minimum wage rates, and 3) they are switching to using more machinery instead of unskilled labor.
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SECTOR NOTE SAKSID PHADTHANANARAK
Ex 18: Impact Of Minimum Wage Hike
Impact of the minimum wage hike on companies' costs
Total workers Workers who are paid the minimum wage 17.81%
8.95% 6.39% 5.57% 5,212,510
0.57% 1.03% 12,901,293 9,994,562 2,818,077 1,801,505 2,980,547 4,212,825 2,870,254 3,987,349 224,211 945,062 213,917
Total Large firms Medium firms Small firms SMEs Micro
Source: Office of the National Economic and Social Development Board
… 3) we see a labor A labor shortage is another problem. Given an increasing number of construction projects, shortage also increasing the Construction Institute of Thailand expects the construction industry to need up to 2.9m contractors’ labor costs workers in 2013 versus 2.3m-2.6m currently. According to the Thai Labor Ministry, at least … an additional 200,000 foreign workers are needed. Fortunately, the minimum wage hike has attracted foreign workers to come to work in Thailand, with most arriving from Myanmar, Laos and Cambodia.
Rising building material prices
… 4) there is a risk of For the cement market, we are not overly concerned given plenty of supply at the moment. building material prices Despite cement demand rising, there hasn't been much upward pressure on cement prices. rising, in our view Note that domestic cement demand of 30.8m tonnes in 2012 was still way below production capacity of 56m tonnes. Domestic consumption grew by around 12% in 2012 as demand for cement surged after Thailand’s severe floods in late 2011, ongoing infrastructure projects and real estate sector expansion. Siam Cement (SCC TB, Bt456, Sell) forecasts domestic cement demand to grow by 5-10% in 2013, in line with Siam City Cement’s (SCCC TB, Unrated) estimate of 7%. Cement prices have been stable at around Bt2,450-2,550/tonne over the past three years.
Ex 19: Domestic Cement Prices
(Bt/tonne) 2,800
2,700
2,600
2,500
2,400
2,300
2,200 Jul-09 Jul-10 Jul-11 Jul-12 Jan-09 Oct-09 Jan-10 Oct-10 Jan-11 Oct-11 Jan-12 Oct-12 Jan-13 Apr-09 Apr-10 Apr-11 Apr-12 Source: Bank of Thailand
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SECTOR NOTE SAKSID PHADTHANANARAK
The government is For the steel market, China’s steel oversupply has continued to put global steel prices under investigating steel pressure. This has also caused domestic steel prices to fall dramatically as the prices of imports from China and imports from China are much cheaper than those of local steel producers. However, we plans to raise import expect domestic steel prices to rise this year due to the government’s planned anti-dumping tariffs duties. Early this year, the Commerce Ministry agreed to apply a temporary safeguard measure by raising import tariffs on hot rolled steel flat products by 33.11%. Moreover, Tata Steel (TSTH TB, Unrated), the largest long steel producer in Thailand, has asked the government to impose anti-dumping duties of at least 20% on steel wire from China. If the duties are applied, we expect domestic steel prices to increase by 10-15%.
Ex 20: Domestic Steel Prices
(Bt/tonne) 25,000
24,000
23,000
22,000
21,000
20,000
19,000
18,000 Jul-09 Jul-10 Jul-11 Jul-12 Jan-09 Oct-09 Jan-10 Oct-10 Jan-11 Oct-11 Jan-12 Oct-12 Jan-13 Apr-09 Apr-10 Apr-11 Apr-12 Source: Ministry of Commerce
The government offers a building material price-adjustment formula, known as escalation factors (or K-factors), to reduce contractors’ risks from rising building material prices. However, the K-factors have a ceiling and a floor in a plus/minus 4% range. This means if building material prices increase or decrease by up to 4%, it is the contractors’ responsibility. Above that the government will compensate the contractors and, in contrast, below that the contractors have to compensate the government. Even though this number seems minimal, it can have a significant impact on contractors’ profitability given government projects’ gross margin of only 5-8%.
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SECTOR NOTE SAKSID PHADTHANANARAK
Our top pick is TTCL
We like contractors with Given government projects’ thin gross margins and the risk of rising construction costs, we effective cost controls, believe the contractors need to have three key characteristics to succeed over the potential good-quality backlog and upcoming seven-year infrastructure cycle. low gearing First, we believe they need to have effective cost controls as the majority of future work will likely come from government projects with very low gross margins.
Second, in our view they need to have a good-quality backlog with a mix of high-margin but low-value private projects and low-margin but high-value government work. This would enable them to sustain gross margins.
These characteristics Third, we see them needing low gearing or net cash positions as they would need higher apply to STEC and TTCL working capital to handle many sizable projects, reducing the risk of a capital call. but TTCL’s valuation is Moreover, without interest expenses to worry about, we expect them to be able to deliver more attractive positive net profit margins despite low-margin government work.
Our top pick is TTCL Thus, we believe these characteristics match STEC and TTCL and we have BUY recommendations on them. However, our top pick is TTCL due to what we view as its more attractive valuation. We see CK as a turnaround play but rate it a SELL as we believe this story is already in the price while we also see the stock as expensive.
STEC: Best local infrastructure play
Among Thailand’s big Among Thailand’s big three contractors, STEC is the only one to have continued to deliver contractors, STEC is the normalized profits over the last four years. We believe this is because of what we see as its only one which we see following unique characteristics. being able to deliver more stable and growing First, STEC only focuses on the domestic construction business, allowing it to have better earnings control over costs, while ITD and CK have exposure to the risky overseas construction business with 48% and 60% of their current backlog values, respectively, coming from domestic construction. Moreover, it has the strongest financial status on our estimates with a net cash position, curbing its risk in the low-margin construction business significantly.
Ex 21: STEC’s Normalized Net Profit Margin Versus Peers’
(%) CK ITD STEC 10 5 0 (5) (10) (15) (20) (25) (30) (75.3) (35)
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 Source: Company data
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SECTOR NOTE SAKSID PHADTHANANARAK
Second, even though it has the lowest backlog value among the big three contractors, we view STEC’s backlog as the best quality with a mix of high-margin private projects and low- margin but high-value government work. We believe this should keep its gross margin less volatile and allow it to enjoy greater economies of scale.
STEC is an expert in STEC is an expert in mechanical work and it dominates the market share in high-margin power plant construction power plant construction. Mitsubishi, Siemens, Marubeni, ABB Alstom and GE are the and currently there are major suppliers of gas turbines in Thailand. They are also major engineering, procurement concerns over potential and construction (EPC) contractors for power plant construction in Thailand and STEC has electricity blackouts good relationships and track records as a subcontractor for civil work with these EPC contractors.
Ex 22: STEC’s Revenue Breakdown By Clients Ex 23: STEC’s Revenue Breakdown By Type Of Work Industrial Pr iv ate Building 18% 6% 1%
Pow er plant Government 16% 10%
Infrastructure
State Ent. 77% 72%
Source: STEC Source: STEC
STEC is offering a stock Given a larger proportion of government work, we don’t expect STEC to be able to avoid its dividend with the ex- gross margin narrowing in the future. However, we expect STEC also to be awarded more dividend date on 15 high-margin power plant projects. Thus, combined with the winning characteristics March 2013 mentioned above, we forecast STEC’s net profit margin to decline slightly.
We have a BUY call on STEC is planning to pay a stock dividend to increase its paid-up capital to Bt1.5bn from STEC with our TP before Bt1.2bn at present. The reason for increasing its paid-up capital is to allow the company to ex-dividend date of be able to bid for a higher work value of government projects. We calculate STEC’s plan for Bt42.00 and after ex- a stock dividend of 338.9m shares (3.5 old shares to 1 new share) implies 28.6% EPS dividend date of Bt32.00 dilution. Despite still depending on approval by the shareholders’ meeting on 11 April 2013, the ex-dividend date is set for 15 March 2013. Thus, our 12-month DCF-based SOTP TP before the ex-dividend date is at Bt42.00 per share while our TP after the ex-dividend date is Bt32.00 per share. We have a BUY rating on STEC.
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SECTOR NOTE SAKSID PHADTHANANARAK
TTCL: Top AEC growth play
TTCL is our top pick in Even though we expect TTCL to benefit less from the government’s infrastructure the sector because … investments due to its focus on engineering work and subcontracting civil work, we still like the company for the following reasons:
…1) it is the best play on First, TTCL is the only Thai EPC contractor and one of just a few in Southeast Asia the AEC market, in our enjoying cost competitiveness from low engineering costs in Thailand. We believe this will view … allow the company to enjoy the Asean Economic Community (AEC) investment boom story. Moreover, we expect the concern about possible electricity blackouts to prompt the government to open the bidding for power plant projects and TTCL has lots of expertise in power plant construction.
Ex 24: TTCL’s Current Bidding Proposals
Utilities, Bt7,200m
Petrochemical, Bt20,400m
Pow er , Bt67,500m
Source: National Energy Committee
…2) its low-inventory Second, we believe its business model of focusing on high-margin engineering work and business model allows it outsourcing low-margin civil work allows it to offer less cyclical margin and sustainable to offer 30%+ ROE, on strong ROE of 30%-plus. Moreover, without civil work, TTCL’s inventory is low, allowing it to our estimates … have less working capital and enjoy a net cash position.
Ex 25: TTCL’s Normalized Net Margin vs Its ROE
(%) Norm net margin (LHS) ROE (RHS) (%) 10 90 9 80 8 70 7 60 6 50 5 40 4 30 3 2 20 1 10 0 0
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 Sources: Company data, Thanachart estimates
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SECTOR NOTE SAKSID PHADTHANANARAK
… 3) power plant Third, to try to secure stable income, TTCL is also investing in joint ventures for some utility investments would help projects it has been awarded for its EPC services. TTCL is the first foreign company to have secure stable income … been awarded construction work and a potential power purchase agreement (PPA) by the Ministry of Electric Power No.2 of Myanmar to develop a 100MW power plant in Yangon. This is a pilot project for TTCL and we expect it to enable the company to bid for other … 4) it is the cheapest power projects in Myanmar afterwards. among the three contractors under our coverage, on our Finally, it is a cheaper choice in the contractor sector on our estimates, trading at 20.9x PE estimates this year falling to just 16.1x in 2014F and 13.6x in 2015F.
We have a BUY on TTCL We have a BUY call on TTCL with a 12-month DCF-based SOTP TP of Bt51.00 per share. with a TP of Bt51.00
CK: Turnaround seems in the price
We downgrade our call We don’t see CK’s characteristics matching our key success factors and we believe its on CK from Buy to SELL turnaround story is already in the price. In our view, CK is a good example of a contractor because … with a huge backlog value that cannot deliver top-line growth to the bottom line due to its huge debt burden. Even though CK’s better backlog quality with 68% from private projects and 32% from government work at end 3Q12 allowed it to report a high and more stable gross margin, its very high gearing which causes huge interest expenses still put its net profit margin under pressure at only 0.3% in 2012.
Ex 26: CK’s Gross Margin vs Net Margin
(%) Gross margin (LHS) Norm net margin (LHS) (%) 20 10 10 0 0 (10) (10) (20) (20) (30) (30) (40) (40) (50) (50) (60) (60) (70) (70) (80) (80)
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 Sources: Company data, Thanachart estimates
We forecast CK’s earnings to turn around from 2013 onward as it is embarking on debt deleveraging. Unfortunately, we believe this is already in the market expectation and the stock now looks expensive, in our view.
… 1) we are concerned First, like other contractors, we expect CK’s gross margin to start falling from 2014 onward about a potential margin given more potential low-margin government projects. Besides rising building material squeeze for CK … prices, we are also concerned about CK’s work in foreign countries, where it can be difficult to control costs.
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SECTOR NOTE SAKSID PHADTHANANARAK
… 2) interest expenses Second, CK is trying to reduce its debts by divesting its investments in Thai Tap Water are still high, outweighing Supply (TTW TB, Bt11.00, Hold) (by selling to Bangkok Expressway [BECL TB, 41.50, Sell]) top-line growth, on our and CK Power (by listing it on the SET). CK plans for the proceeds from these divestments estimates … to mainly be used to repay debts. Even though we expect its net D/E ratio to fall to 1.4x in 2013 from 2.7x in 2012, the major reason for our projection for a sharp fall in its net D/E ratio is because of the mark-to-market value of its remaining TTW stake. Thus, we do not expect a steep drop in CK’s interest expenses.
Ex 27: CK’s D/E Ratio vs Net Debt
(Bt m) Net Debt (LHS) D/E ratio (RHS) (x) 25,000 4.0 23,000 3.8 21,000 3.6 19,000 3.4 17,000 3.2 15,000 3.0 13,000 2.8 11,000 2.6 9,000 2.4 7,000 2.2
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 Sources: Company data, Thanachart estimates
… 3) CK’s valuation is Third, we believe the turnaround story is already in market expectations and the stock now expensive, in our view looks expensive to us. Our SOTP valuation of CK’s investments in TTW, BECL, Bangkok Metro Co (BMCL, unrated), CK Power (unlisted) and the Xayaburi project is Bt17.40/share. Given CK’s current share price of Bt27.25/share, the market appears to be valuing its construction business at Bt9.85, implying PE of 70x in 2013F and 26x in 2014F even though we calculate a DCF-based valuation for CK’s construction business at only Bt2.53/share due to its huge net debts of Bt24bn at end 2012.
We have a SELL call on We downgrade our recommendation to SELL from Buy with a 12-month DCF-based SOTP CK with a TP of Bt20.00 TP of Bt20.00 per share.
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SECTOR NOTE SAKSID PHADTHANANARAK
Ex 28: Sector Valuation Comparison
CK STEC TTCL Average Rating SELL BUY BUY Target price Thanachart 20.00 42.00 51.00 Consensus 30.00 36.00 35.74 Consensus rec. Buy 15.0 20.0 4.0 Hold 2.0 2.0 3.0 Sell 3.0 2.0 2.0 Sales (Bt m) 2012 20,845 19,872 11,358 52,075 2013F 26,506 23,778 17,861 68,146 2014F 33,863 30,472 21,750 86,086 2015F 40,399 36,564 26,020 102,983 Norm profits (Bt m) 2012 58 1,165 548 1,771 2013F 232 1,340 867 2,439 2014F 619 1,611 1,129 3,359 2015F 972 1,920 1,335 4,227 Sales growth (%) 2012 90.0 33.8 27.7 50.0 2013F 27.2 19.7 57.3 30.9 2014F 27.8 28.2 21.8 26.3 2015F 19.3 20.0 19.6 19.6 Norm EPS growth 2012 na 29.0 37.1 na 2013F 300.7 15.0 58.2 37.7 2014F 166.4 20.2 30.3 37.7 2015F 57.0 19.2 18.2 25.8 Operating margin (%) 2012 3.9 5.6 5.3 4.9 2013F 3.8 5.5 5.3 4.8 2014F 2.7 5.5 5.5 4.4 2015F 2.9 5.7 5.5 4.5 ROE (%) 2012 0.8 19.8 29.7 16.8 2013F 2.2 19.7 38.3 20.1 2014F 5.0 20.2 40.0 21.7 2015F 7.7 21.0 38.1 22.3 Dividend yield (%) 2012 1.3 0.1 1.7 1.0 2013F 1.7 1.3 2.4 1.8 2014F 0.6 1.6 3.1 1.8 2015F 1.0 1.8 3.7 2.2 P/BV (x) 2012 5.3 6.8 9.0 6.3 2013F 3.6 5.6 7.2 4.7 2014F 3.7 4.9 5.8 4.4 2015F 3.5 4.2 4.7 3.9 Norm PE (x) 2012 776.5 35.6 33.1 59.1 2013F 193.8 31.0 20.9 42.9 2014F 72.7 25.8 16.1 31.2 2015F 46.3 21.6 13.6 24.8 EV/EBITDA (x) 2012 54.6 27.3 25.8 35.9 2013F 40.4 22.8 17.0 26.7 2014F 40.5 18.6 13.0 24.0 2015F 32.8 15.5 10.5 19.6 Net D/E (x) 2012 2.7 (0.1) (0.9) 0.6 2013F 1.4 (0.2) (0.5) 0.3 2014F 1.2 (0.2) (0.6) 0.2 2015F 0.9 (0.1) (0.6) 0.1 Source: Bloomberg Note: * Thanachart estimates, using normalized EPS Based on 4 March 2013 closing prices
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APPENDIX SAKSID PHADTHANANARAK
STOCK PERFORMANCE
Absolute (%) Rel SET (%) 1M 3M 12M YTD 1M 3M 12M YTD SET INDEX 2.3 15.8 33.1 10.7 — — — — SETPROP 14.3 42.4 117.1 36.2 12.1 26.6 84.0 25.5 CK 27.9 164.6 251.6 103.4 25.7 148.7 218.6 92.7 STEC 21.7 40.0 150.0 28.4 19.5 24.2 116.9 17.8 TTCL 3.4 16.2 165.8 8.6 1.1 0.3 132.8 (2.1)
Source: Bloomberg
SECTOR - SWOT ANALYSIS
S — Strength W — Weakness
Engineering and labor costs are lower than in a number of The majority of revenues are based on projects
other developing countries. contractors have to bid for, and there are no guarantees
But Thai workers are recognized for quality work. they will win the bidding contests.
The construction business is labor-intensive. Thus, higher labor costs and labor shortages could impact contractors’ margins.
O — Opportunity T — Threat
Thai government is planning massive infrastructure Volatility in building material prices, the minimum wage
investments. hike and a labor shortage are major risks.
Property market is also booming in Thailand. Political instability could cause delays to Thailand’s new
investment cycle.
REGIONAL COMPARISON
—EPS growth— ——— PE ——— ——— P/BV ——— —– EV/EBITDA —– —— Div. Yield —— Name 13F 14F 13F 14F 13F 14F 13F 14F 13F 14F (%) (%) (x) (x) (x) (x) (x) (x) (%) (%) China 17.3 14.2 8.3 7.3 1.0 0.9 8.9 8.3 1.9 1.6 India 60.3 37.3 11.0 8.1 0.5 0.4 6.5 5.7 1.6 1.7 Malaysia na 15.0 14.3 12.5 1.6 1.4 12.6 11.0 2.8 3.0 South Korea 44.2 30.2 10.6 8.2 1.0 0.9 8.9 7.6 0.8 1.0 Singapore 28.2 16.0 10.1 8.7 1.5 1.3 3.8 3.6 5.0 5.0 Thailand 75.6 43.9 46.2 28.8 4.0 3.7 15.7 15.4 2.3 2.4 Average 59.8 31.7 25.8 16.6 2.3 2.1 11.8 10.8 2.1 2.2
CH. Karnchang* 300.7 166.4 193.8 72.7 3.6 3.7 40.4 40.5 1.7 0.6 Sino Thai* 15.0 20.2 31.0 25.8 5.6 4.9 22.8 18.6 1.3 1.6 Toyo-Thai Corp. 58.2 30.3 20.9 16.1 7.2 5.8 17.0 13.0 2.4 3.1 Average 37.7 37.7 42.9 31.2 4.7 4.4 26.7 24.0 1.8 1.8
Sources: Bloomberg Consensus Note: * Thanachart estimate – using normalized EPS Based on 4 March 2013 closing prices
THANACHART SECURITIES | DAIWA CAPITAL MARKETS 20
6 MARCH 2013 A d H oc R SELL (From: BUY) TP: Bt 20.00 (From: Bt 10.00) e se a rch Change in Recommendation Downside: -26.6%
Thanachart
Securities
Ch. Karnchang Pcl (CK TB)
Turnaround seems in the price
Although we lift our TP for CK by 100% given the government’s huge potential infrastructure investments, we see its valuation as expensive, trading at a construction business PE of 70x this year versus STEC’s 31x and TTCL’s 20.9x even though we believe it’s exposed to higher risk of earnings losses given interest expenses. Downgrade to SELL. SAKSID PHADTHANANARAK 662 – 617 4900
Downgrade to SELL [email protected]
We raise our TP for CK to Bt20.00/share from Bt10.00 due to two major COMPANY VALUATION reasons. First, we revise up CK’s new work value by 94% in 2013-15F onward to reflect upcoming work from the government’s massive potential Y/E Dec (Bt m) 2012A 2013F 2014F 2015F Bt2tr infrastructure investment. Second, we raise our SOTP valuation of CK’s Sales 20,845 26,506 33,863 40,399 investments to Bt17.40/share from Bt15.30 due to our new fair value for Thai Net profit 568 2,432 619 972 Tap Water (TTW TB), Bangkok Expressway (BECL TB), and Bangkok Metro Consensus NP ⎯ 2,996 990 1,830 Co (BMCL, unrated), CK Power (CKP, unlisted) and the Xayaburi project. Diff frm cons (%) ⎯ (18.8) (37.5) (46.9) However, the current share price is now trading above our fair value. We Norm profit 58 232 619 972 therefore downgrade our rating to SELL from Buy. Prev. Norm profit ⎯ 604 776 1,039 Chg frm prev (%) ⎯ (61.5) (20.3) (6.5) Expensive valuation Norm EPS (Bt) 0.0 0.1 0.4 0.6 CK’s valuation looks expensive to us. Our SOTP valuation of CK’s investments in TTW, BECL, BMCL, CK Power and the Xayaburi project Norm EPS grw (%) na 300.7 166.4 57.0 comes to Bt17.40/share. Given CK’s current share price of Bt27.25/share, we Norm PE (x) 776.5 193.8 72.7 46.3
believe the market values its construction business at Bt9.85/share, implying EV/EBITDA (x) 54.6 40.4 40.5 32.8
P/BV (x) 5.3 3.6 3.7 3.5 PE of 70x in 2013F versus STEC’s 31x and TTCL’s 20.9x. Please note that we calculate a DCF-based valuation for CK’s construction business of only Div yield (%) 1.3 1.7 0.6 1.0 Bt2.53/share due to its huge net debt of Bt24bn. ROE (%) 0.8 2.2 5.0 7.7 Net D/E (%) 272.5 143.0 124.3 92.7 Less margin for error
We have no doubt about CK’s strong top-line growth outlook. However, like PRICE PERFORMANCE other typical contractors, we see CK’s earnings visibility as low with high
gross margin volatility. Even worse is that its high SG&A and interest (Bt/shr) (%) CK Rel to SET Index expenses mean it has less room for error, in our view. CK is planning to 29.0 250 200 reduce its net D/E ratio from 2.7x in 2012 to below 1.5x in 2013 by divesting 24.0 15 0 19 . 0 some of its TTW stake from 31% to 19%. Even though it plans for money 10 0 14 . 0 from the TTW divestment (Bt3.3bn) and the listing of CK Power on the SET 50 in 2Q13 to be used to pay off debts, we believe the major reason for the 9.0 0
sharp expected fall in its net D/E ratio is because of mark-to-market valuing 4.0 (50) M a r - 12 J u l - 12 N o v - 12 M a r - 13
of the remaining TTW stake (~Bt6bn). As this is just an accounting method
and CK’s net debts are still high, we don’t expect a big drop in CK’s interest COMPANY INFORMATION expenses. Thus, we forecast its normalized profit margin to stay low at only 0.9% in 2013 and 1.8% in 2014. Price as of 4-Mar-13 (Bt) 27.25 Market cap (US$ m) 1,437.8 We prefer STEC and TTCL Listed shares (m shares) 1,652.6
As we see the construction business as risky while the sector is now trading Free float (%) 57.2
at very high forecast PE multiples, any hitches such as a building material Avg daily turnover (US$ m) 13.2 price spike or delays to government projects could have a significant impact 12M price H/L (Bt) 27.5/6.7 on our earnings forecasts. Thus, we prefer contractors with effective cost Sector Construction control, low gearing or net cash positions and good-quality backlog, allowing Major shareholder Trivisvavet 40.1% them to offer higher net profit margins and have more room for error. We see Sources: Bloomberg, Company data, Thanachart estimates these characteristics matching Sino-Thal Engineering & Construction (STEC TB) and Toyo-Thai Engineering (TTCL TB).
Please see the important notice on the back page.
6 MARCH 2013 Ad Hoc Research
Ex 1: Key Assumption Changes 2013F 2014F 2015F
New work value (Bt m) - New 47,150 49,508 51,983 - Old 24,295 25,510 26,786
- Change (%) 94.1 94.1 94.1
Total sales (Bt m) - New 26,506 33,863 40,399
- Old 21,597 27,760 34,539
- Change (%) 22.7 22.0 17.0
Gross margin (%)
- New 6.3 6.0 5.5
- Old 7.0 6.0 5.0 - Change (%) (0.7) ⎯ 0.5
SG&A to sales ratio (%) - New 6.3 6.0 5.5 - Old 7.0 6.0 5.0 - Change (%) (0.7) ⎯ 0.5
Net profit (Bt m) - New 232 619 972 - Old 604 776 1,039
- Change (%) (61.5) (20.3) (6.5)
Working capital (Bt m) - New 11,358 11,655 11,897
- Old 23,431 30,809 38,323 - Change (%) (51.5) (62.2) (69.0) Sources: Thanachart estimates
Even though we significantly revise up our new work value assumption, we lower our 2013-15 earnings forecasts by 7-62% largely on a lower equity income assumption due to lower-than-expected equity income in 2012 and CK’s divestment of some of its TTW stake from 31% to 19% this year.
Ex 2: CK’s Shareholders Structure Ex 3: CK’s Board Of Directors
Foreign Banks CK was established in 1972 by the Trivisvavet family and it has investor 2% been in the construction business for 40 years. CK’s board of 7% directors has 12 members. Two members including Mr. Plew
Trivisvavet, the CEO, come from Trivisvavet family. Five other
Others members are independent directors and the rest are key 51% management.
Trivisvavet family 40%
Source: Company data Source: Company data
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6 MARCH 2013 Ad Hoc Research
Ex 4: CK’s Current Backlog Current projects Period Value Backlog Progress
(As of September 2012) (Bt m) (Bt m) (%) 1. Education center & Environmental preservation construction project 8-12 2,379 5 99.8 2. Purple Line project, contract 1 9-13 13,976 3,639 62.8
3. Charan Sanit Wong-Borommaratchachonnani underpass project 9-12 889 55 93.8
- Water supply pipeline & related work 9-12 - Manhole & Electrical underground duct bank 9-12 - Underground telephone cable duct of Bang Plud telephone exchange 9-12
4. Manhole and underground electricity cable duct of Purple Line project 10-13 351 140 43.0
5. Water diversion from Eastern Chao Phraya to Bangpra reservoir project 9-12 1,849 466 58.0 6. Blue Line extension project - Underground civil; Sanam Chai-Tha Phra 11-17 9,988 7,092 29.0 - Track work 11-17 4,672 3,971 15.0
7. Chiang Rai solar power project 11-12 951 808 15.0 8. Bangpa-In cogeneration project (SPP) 11-13 4,550 1,411 69.0 9. New Tobacco production plants project 11-14 4,619 3,972 14.0 10. Pakthongchai solar project 11-12 760 15 98.0
11. Royal Thai Consulate General and residence in Lao PDR 11-13 98 71 28.0
12. Green Line project, contract 1 12-16 13,167 11,784 10.5 13. Construction of the Expressway Period 3 Phase 1 12-13 87 87 0.0 14. Bangpa-In Estate rehabilitation projects 12-13 630 302 52.0
15. Xayaburi : A run-of-river hydropower project 12-20 76,000 66,396 10.8
16. Si Rat-Outer Bangkok Ring Road Expressway Sector B+ 12-15 22,500 22,500 0.0 17. Poodoo-Paklay road construction project 12-14 660 0 0.0 18. Other projects 11-12 4,520 1,709 62.2 Total 162,646 124,424
Projects awaiting contract signing Period (Bt m) 1. Small Power Plant phase II 2012 5,000 2. The MRT Green Line project contract 2: track work 2012 2,500
3. The MRT Purple Line project, contract 4: concession for supply of M&E system and O&M services 2013 14,364 Total 21,864 Source: Company data
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6 MARCH 2013 Ad Hoc Research
Ex 5: CK’s Projects For Bidding in 2013-14F
Projects Value (Bt m)
MRT - Dark Green Line (Mo Chit – Saphan Mai) 36,513
- Dark Green Line (Saphan Mai – Lum Luk Ka) 11,000 - Pink Line (Khae Rai – Min Buri) 50,000 - Dark Red Line (Taling Chan – Siriraj) 5,000
- Orange Line (Thailand National Culture – Min Buri) 55,000 Double track - Double track (Klong 19 – Keang Koy) 11,000
- Double track (Prachuap Khiri Khan – Chumphon) 17,000 - Double track (Thanon Chira – Khon Kaen) 25,000
High-speed trains (4 routes) 413,803
Airport Rail Link (Extension : Phaya Thai – Bang Sue – Don Muang) 30,000 Motorways (2 routes): Bang Yai – Ban Pong – Nam Phu Ron, Bangpa-In – Korat) 40,000
Airport
- Suvarnabhumi Airport (Phase II) 62,503 Building
- MEA office building, Klong Toei 3,500
Water management work - Flood protection system 350,000
- Nong Bon water diversion tunnel project 4,900 Total 1,117,119 Source: Company data
Ex 6: CK’s Gross Margin vs Peers’ Ex 7: CK’s Net Margin vs Peers’
(%) CK ITD STEC (%) CK ITD STEC
20 10
15 5 10 0 5 (5) 0 (10) (5) (15) (10) (20) (15) (25) (20) (30) (69.2) (75.3) (25) (35)
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12
Source: Company data Source: Company data
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6 MARCH 2013 Ad Hoc Research
Ex 8: EV Of Construction Business Terminal (Bt m) 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F Value EBITDA 1,565 1,501 1,751 2,072 2,622 3,288 3,808 4,171 4,572 5,015 5,505 — Free cash flow 1,295 575 869 786 1,206 1,979 1,627 2,597 2,984 3,425 3,626 48,541 PV of free cash flow 1,292 479 660 545 762 1,140 855 1,245 1,305 1,367 1,320 17,669
Risk-free rate (%) 4.0 Market risk premium (%) 8.0 Beta 1.0
Wacc (%) 9.6
Terminal growth (%) 2.0
Enterprise value - add 28,639 investments Net debt 24,148 Minority interest 301 Equity value 4,189
# of shares 1,653 Equity value/share 2.5
Sum-of-the-parts % holding (Bt m)
Enterprise value from construction business 28,639 Investment equity value 28,716 TTW 19.04 5,698 BECL 15.15 3,733
BMCL 24.61 1,617 Xayaburi 50.00 13,108 CKP 38.00 4,560 Total enterprise value 57,354
(Less) Net debt (24,148)
(Less) Minority interest (301) Total enterprise value 32,905 # of shares (fully diluted) (m shares) 1,653 Sum-of-the-parts (Bt/share) 20.0
Source: Thanachart estimates
We increase our 12-month DCF-based target price to Bt20 (from Bt10) due to the
following reasons:
Higher EBITDA due to an increase in our new work value forecasts (94% over
2013-15) Higher sum-of-the-parts valuation due to our new fair value for Thai Tap Water
(TTW TB), Bangkok Expressway (BECL TB), and Bangkok Metro Co (BMCL,
unrated), CK Power (CKP, unlisted) and the Xayaburi project.
THANACHART SECURITIES | DAIWA CAPITAL MARKETS 25
6 MARCH 2013 Ad Hoc Research
COMPANY DESCRIPTION COMPANY RATING
Financial Ch. Karnchang Pcl (CK) is one of Thailand’s leading Rating Scale management contractors and basic infrastructure developers. It has more 5 Very Strong 5 4 than 30 years of experience in constructing large-scale 3 Risk Strong 4 infrastructure, building complexes and general civil work. The Manage 2 manage ment 1 company has high capacity and potential in work execution. It ment Good 3 0 has also been investing in the government’s concession Fair 2 projects in order to expand its operations and generate steady *Corp. Liquidity long-term income. governance Weak 1
None 0
Source: Thanachart Source: Thanachart; *CG Awards
THANACHART’S SWOT ANALYSIS
S — Strength W — Weakness
One of the big three contractors in Thailand and The majority of CK’s revenues are based on projects it
categorized as class A in terms of being qualified to has to bid for, and there are no guarantees it will win
bid for most large-scale investments. these bidding contests.
Business diversification into infrastructure investments CK’s debt level is very high, meaning it’s exposed to a
to stabilize its long-term earnings. higher risk of a capital call, in our view.
O — Opportunity T — Threat
Thailand is entering a new multi-year investment cycle. Volatility in building material prices is a major risk and
we expect this to increase next year. The government is continuing with pump-priming and
populist policies. Political instability could cause delays to Thailand’s
new investment cycle. Concerns about electricity blackouts have prompted the government agency to support power plant
projects.
CONSENSUS COMPARISON RISKS TO OUR INVESTMENT CASE
Consensus Thanachart Diff
Building material expenses account for 50-60% of Target price (Bt) 30.00 20.00 -33% CK’s total costs. Therefore, we see fluctuations in Net profit 13F (Bt m) 2,996 2,432 -19% prices presenting a major risk to our earnings
Net profit 14F (Bt m) 990 619 -37% projections.
Consensus REC BUY: 15 HOLD: 2 SELL: 3 Political instability in Thailand is another concern as it
HOW ARE WE DIFFERENT FROM THE STREET? could have a significant impact upon people’s
confidence and new investments.
Our earnings forecast is lower than the consensus as
we expect CK to face a margin squeeze due to more
expected low-margin work and rising building material
prices
Our TP is also lower given our lower earnings forecasts.
Sources: Bloomberg consensus, Thanachart estimates Source: Thanachart
THANACHART SECURITIES | DAIWA CAPITAL MARKETS 26
6 MARCH 2013 Ad Hoc Research
FINANCIAL SUMMARY
Income Statement (consolidated) Quarterly Earnings (consolidated)
FY ending Dec (Bt m) 2011A 2012A 2013F 2014F 2015F 4Q11 1Q12 2Q12 3Q12 4Q12 Sales 10,972 20,845 26,506 33,863 40,399 Sales 2,741 4,301 4,264 5,388 6,892
Cost of sales 10,368 18,457 23,824 30,902 37,018 Cost of sales 2,380 3,792 3,648 4,843 6,174
Gross profit 603 2,388 2,682 2,961 3,381 Gross profit 362 509 617 545 718 SG&A 1,461 1,571 1,670 2,032 2,222 SG&A 483 297 522 373 379 Operating profit (858) 817 1,013 930 1,159 Operating profit (121) 211 94 172 339 Depre & amortization 423 451 552 572 591 Depre & amortization 107 108 113 13 217
EBITDA (435) 1,267 1,565 1,501 1,751 EBITDA (13) 319 207 186 556
Other income 585 739 733 755 805 Other income 2 68 35 21 (9) Other expenses 00000Other expenses00000 Interest expense (1,079) (1,421) (1,267) (1,037) (1,039) Interest expense (298) (304) (327) (391) (398) Pre-tax profit (1,352) 135 478 648 926 Pre-tax profit (300) 63 35 (14) 51
Income tax 564 313 383 194 231 Income tax 26 53 110 42 107 After-tax profit (1,916) (177) 96 453 694 After-tax profit (326) 10 (75) (57) (55) Equity income 570 268 178 218 341 Equity income 19 104 (26) 127 63 Minority interests (10) (32) (41) (53) (63) Minority interests (3) (5) (6) (17) (3) Extraordinary items 2,283 510 2,200 0 0 Extraordinary items 21 0 232 30 249
NET PROFIT 927 568 2,432 619 972 NET PROFIT (289) 108 124 83 253 Normalized profit (1,355) 58 232 619 972 Normalized profit (310) 108 (108) 53 4
EPS (Bt) 0.6 0.3 1.5 0.4 0.6 EPS (Bt) (0.2) 0.1 0.1 0.1 0.2
Normalized EPS (Bt) (0.8) 0.0 0.1 0.4 0.6 Normalized EPS (Bt) (0.2) 0.1 (0.1) 0.0 0.0
Balance Sheet (consolidated) Financial Ratios And Valuations FY ending Dec (Bt m) 2011A 2012A 2013F 2014F 2015F 2011A 2012A 2013F 2014F 2015F
Cash & equivalent 4,019 3,973 1,500 1,500 1,500 Norm profit (y-y%) na na 300.7 166.4 57.0 A/C receivables 4,453 5,324 5,810 7,422 8,855 Normalized EPS (%) na na 300.7 166.4 57.0 Inventories 9,093 11,293 11,749 12,276 12,677 Net profit (y-y%) na (38.7) 327.9 (74.5) 57.0 Other current assets 4,545 10,087 11,975 11,975 11,975 EPS (%) na (38.7) 327.9 (74.5) 57.0
Investment 10,159 14,068 13,025 13,075 13,125 Dividend payout (%) 44.5 101.8 31.0 45.0 45.0 Fixed assets 2,911 4,700 4,448 4,176 3,885 Other assets 1,459 1,740 1,700 2,000 2,386 Gross margin (%) 5.5 11.5 10.1 8.7 8.4 Total assets 36,640 51,185 50,207 52,424 54,403 Operating margin (%) (7.8) 3.9 3.8 2.7 2.9 EBITDA margin (%) (4.0) 6.1 5.9 4.4 4.3
S-T debt 7,296 10,528 7,305 6,385 5,161 Net margin (%) (17.5) (0.9) 0.4 1.3 1.7 A/C payables 2,513 5,462 6,201 8,043 9,635 Other current liabilities 4,651 8,220 10,845 13,604 16,379 ROA (%) na 0.1 0.5 1.2 1.8 L-T debt 15,502 17,593 12,438 10,872 8,788 ROE (%) na 0.8 2.2 5.0 7.7 Other liabilities 83 521 663 847 1,010 Net D/E (x) 2.8 2.7 1.4 1.2 0.9
Total liabilities 30,045 42,324 37,451 39,751 40,973
Norm PE (x) na 776.5 193.8 72.7 46.3 Minority interest 211 301 343 395 458 Norm PE at TP (x) na 569.9 142.2 53.4 34.0 Shareholders' equity 6,384 8,559 12,413 12,278 12,972 PE (x) 48.6 79.2 18.5 72.7 46.3
EV/EBITDA (x) na 54.6 40.4 40.5 32.8
Working capital 11,033 11,155 11,358 11,655 11,897 P/BV (x) 7.1 5.3 3.6 3.7 3.5 Total debt 22,798 28,121 19,743 17,257 13,949 Dividend yield (%) 0.9 1.3 1.7 0.6 1.0 Net debt 18,779 24,148 18,243 15,757 12,449 Free cash flow (6,607) (3,019) 7,059 3,406 3,859 BV/share (Bt) 3.9 5.2 7.5 7.4 7.8
Year End Shares (m) 1,653 1,653 1,653 1,653 1,653 DPS (Bt) 0.3 0.4 0.5 0.2 0.3
Sources: Company data, Thanachart estimates
Note: Net margin – using the profit after tax for calculation
THANACHART SECURITIES | DAIWA CAPITAL MARKETS 27
6 MARCH 2013
A d H oc BUY (Unchanged) TP: Bt 42.00 (Pre XD) (From: Bt 21.00) R e TP : Bt 32.00 (Post XD) se arch Change in Numbers Upside: 20.0%
Thanachart
Securities
Sino-Thai Eng. & Cons. Pcl (STEC TB)
Best local infrastructure play
We see STEC as the best play on the potential Bt2tr infrastructure cycle. We expect STEC’s efficient cost control, good backlog quality and net cash position to allow it to face less of a margin squeeze than its rivals from more low-margin government work, rising building material prices and the minimum wage hike. Our TP is raised to Bt42.00. Reaffirm BUY. SAKSID PHADTHANANARAK 662 – 617 4900
TP upgraded to Bt42.00, reaffirm BUY [email protected]
As we expect the Bt2tr infrastructure bill to be approved by the cabinet in COMPANY VALUATION March, we expect it to take a few months to pass parliament and become law. Then, Thailand’s new infrastructure cycle would kick off. We revise up Y/E Dec (Bt m) 2012A 2013F 2014F 2015F
STEC’s new work value by 36-70% in 2013-15F to Bt36bn-49bn to reflect the Sales 19,872 23,778 30,472 36,564 government’s large, seven-year investment plan versus STEC’s new work Net profit 1,165 1,340 1,611 1,920 value of Bt15bn-25bn in a normal year and its record-high new work value of Consensus NP ⎯ 1,327 1,554 1,753 Bt42bn in 2011 (mainly the Bt12.4bn Blue Line and Bt17.3bn worth of IPP Diff frm cons (%) ⎯ 1.0 3.7 9.5 power plants). This causes our 12-month DCF-based TP to rise significantly Norm profit 1,165 1,340 1,611 1,920 to Bt42.00 from Bt21.00. We reaffirm our BUY rating. Prev. Norm profit ⎯ 1,222 1,390 1,577 Best play in this infrastructure cycle, in our view Chg frm prev (%) ⎯ 9.7 15.9 21.8 If the new infrastructure cycle begins, we see all contractors enjoying lots of Norm EPS (Bt) 1.0 1.1 1.4 1.6 work to boost their revenues. However, we don’t believe all players will see Norm EPS grw (%) 29.0 15.0 20.2 19.2
top-line growth translate into bottom line growth. We expect all contractors to Norm PE (x) 35.6 31.0 25.8 21.6
face a margin squeeze due to a higher proportion of low-margin government EV/EBITDA (x) 27.3 22.8 18.6 15.5 projects, rising building material prices and the minimum wage hike but we P/BV (x) 6.8 5.6 4.9 4.2 forecast STEC’s margin to suffer less given its efficient cost controls from its Div yield (%) 0.1 1.3 1.6 1.8
focus on domestic work, good backlog quality with a mix of low-margin ROE (%) 19.8 19.7 20.2 21.0 government works and high-margin private projects, and a net cash position. Net D/E (%) (13.8) (17.6) (15.1) (13.2)
Sensitivity analysis on new work value PRICE PERFORMANCE Although we believe the government’s infrastructure investments will be implemented and we follow STEC’s guidance on the new work value of (Bt/shr) (%) STEC Rel to SET Index Bt30bn-40bn this year, we still see a risk to our forecasts as new work value 40 15 0 35 still depends on the economy and politics, bidding periods and competition. 30 10 0 25 We thus do a sensitivity analysis on changes to new work value. In the worst- 50 20 case scenario with new work value of Bt21bn-29bn in 2013-15, we calculate 15 0 our 12-month DCF-based TP at Bt27.00 while in the best case with new work 10 5 (50) value of Bt45bn-62bn in 2013-15, our TP would be at Bt51.00. The Thai M ar-12 Jul-12 Nov-12 M ar-13 contractor sector has never traded on low PE multiples. We believe this is
because the industry cycle is very lengthy, and this would be especially the COMPANY INFORMATION case if Thailand’s seven-year investment cycle gets going. STEC’s shares Price as of 4-Mar-13 (Bt) 35.00 now trade at 31x forecast PE this year. But, given that we forecast an EPS
CAGR of 18% over 2012-15, we see its PE falling to 25.8x in 2014F and Market cap (US$ m) 1,325.6 Listed shares (m shares) 1,186.2 21.6x in 2015F versus STEC’s historical PE range of 15-57x. Free float (%) 69.0 Stock dividend Avg daily turnover (US$ m) 5.7 STEC’s plan for a stock dividend of 338.9m shares (3.5 old shares to 1 new 12M price H/L (Bt) 37.5/12.3 share) implies 28.6% EPS dilution. The reason why STEC plans to pay a Sector Construction
stock dividend is to boost its paid-up capital to be able to bid for more work. Major shareholder Chanvirakul family 23.6% The ex-dividend date is set for 15 March 2013. After going XD, we calculate Sources: Bloomberg, Company data, Thanachart estimates our 12-month DCF-based TP would be diluted to Bt32.00 per share.
Please see the important notice on the back page.
6 MARCH 2013 Ad Hoc Research
Ex 1: Key Assumption Changes
2013F 2014F 2015F
New work value (Bt m) - New 35,694 42,833 49,258
- Old 26,270 27,583 28,962 - Change (%) 35.9 55.3 70.1
Total sales (Bt m) - New 23,778 30,472 36,564 - Old 22,330 26,557 29,527
- Change (%) 6.5 14.7 23.8
SG&A to sales ratio (%)
- New 2.7 2.5 2.3 - Old 3.0 2.8 2.7
- Change (%) (0.3) (0.3) (0.4)
Net profit (Bt m)
- New 1,340 1,611 1,920
- Old 1,222 1,390 1,577 - Change (%) 9.7 15.9 21.8
Working capital (Bt m) - New 3,414 3,994 4,332
- Old 3,005 4,242 3,976 - Change (%) 13.6 (5.8) 8.9 Source: Thanachart estimates
We increase our 2013-15 earnings forecasts by 10-22% largely on account of our higher forecasts for new work value. As we expect some portions of STEC’s new work value to come from the private sector, which is less subject to pricing pressure as the
public sector, we see room for operating margin expansion due to better economies of
scale.
Ex 2: STEC’s Shareholders Structure Ex 3: STEC’s Board Of Directors
Chanvirakul f amily Mr. Chavarat Charnvirakul, the former leader of the 24% Bhumjaithai Party (now Mr. Anuthin Charnvirakul becomes the leader), founded STEC in 1962 and it has been in the
construction business for 50 years. STEC’s board of directors has 12 members. Three come from the Charnvirakul family,
five are independent directors and the rest including the CEO,
Mr. Pakpoom Srichamni, are key management. Thai NVDR
7% Others 69%
Source: Company data Source: Company data
THANACHART SECURITIES | DAIWA CAPITAL MARKETS 29
6 MARCH 2013 Ad Hoc Research
Ex 4: STEC’s New Work Value Sensitivity Analysis
2013F 2014F 2015F TP (Bt)
Worst-case scenario 27.00 - New work value (Bt m) 21.15 25.38 29.19
- EPS (Bt) 1.06 1.18 1.25 Scenario #1 33.00 - New work value (Bt m) 26.40 31.73 36.49
- EPS (Bt) 1.09 1.25 1.39 Base-case scenario 42.00 - New work value (Bt m) 35.69 42.83 49.26
- EPS (Bt) 1.14 1.37 1.62 Scenario #3 46.00
- New work value (Bt m) 39.66 47.59 54.73
- EPS (Bt) 1.16 1.42 1.72 Best-case scenario 51.00
- New work value (Bt m) 44.95 53.94 62.03
- EPS (Bt) 1.19 1.48 1.85 Sources: Company data, Thanachart estimates
Our base-case scenario is in line with management guidance. We note that over the 2011-12 period management has largely achieved its new work value targets.
Ex 5: STEC’s Potential Project Bids In 2013-14
Budget (Bt bn) Mass Rapid Transit 152.5
- Dark Green Line (Mo Chit – Saphan Mai) 36.5
- Dark Green Line (Saphan Mai – Lum Luk Ka) 11.0 - Pink Line (Khae Rai – Min Buri) 50.0
- Orange Line (Thailand National Culture – Min Buri) 55.0 Double Track Railway 53.0
- Double Track (Klong 19 – Keang Koy) 11.0 - Double Track (Prachuap Khiri Khan – Chumphon) 17.0
- Double Track (Thanon Chira – Khon Kaen) 25.0 Power Plant Projects 29.7
- SPP & Cogeneration projects (scheduled to COD in 2015-16) 29.7*
High Speed Train (4 routes) 413.8
Airport Rail Link (Extension: Phaya Thai – Bang Sue – Don Muang) 30.0
Motorway (2 routes: Bang Yai – Ban Pong – Nam Phu Ron & Bangpa-In – Korat) 101.7 Suvarnabhumi Airport’s Phase 2 expansion 62.5
The Parliament House 12.0 Sources: Company data, *Thanachart estimates
THANACHART SECURITIES | DAIWA CAPITAL MARKETS 30
6 MARCH 2013 Ad Hoc Research
Ex 6: STEC’s Current Order Book As Of 14 February 2013
Active Major Projects (Bt m) To-be-signed Contract (Bt m)
Red Line C1, SRT 17,784 Hospital, Metta Pracharuk Hospital 755 Purple Line package II, MRTA 13,100
Blue Line, MRTA 12,463 Newly Signed Contracts (2013) (Bt m) Independent Power Plant, Gulf JP UT 8,725 Head Office, CAT 2,279 Independent Power Plant, Gulf JP NS 8,532 CP Leadership Development Center 1,567
Phuket Int’l Airport expansion, AOT 4,810 7 small power plants, Gulf JP 7,215 Remaining contract value (as of Jan 2013) 55,585
Light Green Line Taksin-Bangwa 3,122 Value of contracts signed year to date 3,846
Track rehabilitation, SRT 2,754 Total 59,431 E-W corridor (Rachapruk-Kanchanapisek) 2,381 (Deduct) value of contracts realized
Supreme Court 2,360 Add to-be-signed contracts 755
Water Pipeline, Chanthaburi-Rayong, RID 1,225 Remaining order book 60,186 PNG-LNG pipe fabrication 761
Source: Company data
Ex 7: STEC’s Revenues vs Backlog Value
(Bt m) Revenue Backlog at year end 60,000
50,000
40,000
30,000
20,000
10,000
0 2005 2006 2007 2008 2009 2010 2011 2012
Source: Company data
THANACHART SECURITIES | DAIWA CAPITAL MARKETS 31
6 MARCH 2013 Ad Hoc Research
Ex 8: 12-month DCF-based TP Calculation Terminal (Bt m) 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F Value EBITDA 1,764 2,167 2,591 3,072 3,629 4,161 4,709 5,373 6,135 6,962 7,906 8,985 —
Free cash flow 714 1,053 1,638 2,041 2,662 3,277 3,572 4,158 4,837 5,586 6,176 7,103 91,014 PV of free cash flow 712 871 1,232 1,396 1,656 1,854 1,838 1,945 2,057 2,161 2,173 2,272 29,112
Risk-free rate (%) 4.0
Market risk premium (%) 8.0 Beta 0.9
Wacc (%) 10.0 Terminal growth (%) 2.0
Enterprise value - add 48,566 investments Net debt (879) Minority interest 200
Equity value 49,245
# of shares 1,186
Equity value/share 42.0
Source: Thanachart estimates Note: Our TP of Bt42.00 is before the stock dividend
We increase our 12-month DCF-based target price to Bt42 (from Bt21) mainly due to the significant earnings upgrade due to an increase in our new work value forecasts (36-70% over 2013-15).
At our target price of Bt42, the shares of STEC would be trading at an implied 2013F PER of 37x, which is around the mid-point of its historical past-ten-year range of 15- 57x.
THANACHART SECURITIES | DAIWA CAPITAL MARKETS 32
6 MARCH 2013 Ad Hoc Research
COMPANY DESCRIPTION COMPANY RATING
Financial Sino-Thai Engineering & Construction (STECON) is one of the Rating Scale management three biggest construction companies in Thailand, engaged in 5 Very Strong 5 4 civil and mechanical work in buildings, infrastructure, energy, 3 Risk Strong 4 environment and industrial projects. It operates and offers Manage 2 manage ment 1 services as a main contractor, sub-contractor, and joint- 0 ment Good 3 venture partner to both government and private sector clients. Fair 2 It classifies its construction services into five categories: *Corp. Liquidity Infrastructure Construction, Industrial, Building Construction, governance Weak 1 Power and Energy, and Environmental projects. None 0
Source: Thanachart Source: Thanachart; *CG Awards, no rating
THANACHART’S SWOT ANALYSIS
S — Strength W — Weakness
Strongest financial position in the sector on our The majority of STEC’s revenues are based on
estimates with a net cash position. projects it has to bid for, and there are no guarantees it
Class-A contractor able to bid for all construction work. will win these bidding contests.
An expert in power and petrochemical plant The construction business is labor-intensive. Thus, there are risks from higher labor costs and labor construction. shortages.
O — Opportunity T — Threat
We see Thailand entering a new multi-year investment Volatility in building material prices is a major risk and
cycle. this is expected to increase this year.
The government intends to continue with pump- Political instability could cause delays to Thailand’s
priming and populist policies. new investment cycle. Concerns about electricity blackouts have prompted
the government agency to speed up power plant
expansion.
CONSENSUS COMPARISON RISKS TO OUR INVESTMENT CASE
Consensus Thanachart Diff
Building material expenses account for 50% of STEC’s Target price (Bt) 36.00 42.00* 17% total costs. Therefore, fluctuations in prices present a Net profit 13F (Bt m) 1,327 1,340 1% major risk to our earnings projections. Net profit 14F (Bt m) 1,554 1,611 4% Political instability in Thailand is another concern as it Consensus REC BUY: 20 HOLD: 2 SELL: 2 has a significant impact upon people’s confidence and
new investments. HOW ARE WE DIFFERENT FROM THE STREET?
Our earnings forecasts are above the consensus given our higher new work value assumptions.
Our TP is also higher following our higher new work
assumption over the long term.
Sources: Bloomberg consensus, Thanachart estimates
Note: *Target price pre-XD Source: Thanachart
THANACHART SECURITIES | DAIWA CAPITAL MARKETS 33
6 MARCH 2013 Ad Hoc Research
FINANCIAL SUMMARY
Income Statement (consolidated) Quarterly Earnings (consolidated)
FY ending Dec (Bt m) 2011A 2012A 2013F 2014F 2015F 4Q11 1Q12 2Q12 3Q12 4Q12 Sales 14,854 19,872 23,778 30,472 36,564 Sales 3,429 4,254 4,399 5,777 5,443
Cost of sales 13,622 18,198 21,836 28,042 33,648 Cost of sales 3,143 3,869 3,983 5,339 5,007
Gross profit 1,232 1,674 1,941 2,430 2,916 Gross profit 285 385 416 437 436 SG&A 482 561 642 762 841 SG&A 122 123 143 141 155 Operating profit 750 1,112 1,299 1,668 2,075 Operating profit 164 262 273 297 280 Depre & amortization 375 374 465 499 516 Depre & amortization 94 95 92 93 94
EBITDA 1,125 1,486 1,764 2,167 2,591 EBITDA 258 357 365 389 375
Other income 170 297 356 318 299 Other income 19 17 21 36 32 Other expenses 00000Other expenses00000 Interest expense (12) (18) (15) (9) (11) Interest expense (3) (3) (4) (3) (8) Pre-tax profit 907 1,392 1,641 1,977 2,363 Pre-tax profit 230 316 333 372 372
Income tax 23 253 328 395 473 Income tax 2 20 76 82 75 After-tax profit 884 1,139 1,312 1,582 1,890 After-tax profit 228 295 257 290 296 Equity income 23 27 25 25 25 Equity income (2) 5 9 18 (6) Minority interests (3) (0) 3 4 5 Minority interests 13 0 (0) (0) (0) Extraordinary items00000Extraordinary items00000
NET PROFIT 904 1,165 1,340 1,611 1,920 NET PROFIT 239 301 266 308 290 Normalized profit 904 1,165 1,340 1,611 1,920 Normalized profit 239 301 266 308 290
EPS (Bt) 0.8 1.0 1.1 1.4 1.6 EPS (Bt) 0.2 0.3 0.2 0.3 0.2
Normalized EPS (Bt) 0.8 1.0 1.1 1.4 1.6 Normalized EPS (Bt) 0.2 0.3 0.2 0.3 0.2
Balance Sheet (consolidated) Financial Ratios And Valuations FY ending Dec (Bt m) 2011A 2012A 2013F 2014F 2015F 2011A 2012A 2013F 2014F 2015F
Cash & equivalent 848 1,343 1,500 1,500 1,500 Norm profit (y-y%) 103.6 29.0 15.0 20.2 19.2 A/C receivables 2,184 1,824 2,248 2,880 3,456 Normalized EPS (%) 103.6 29.0 15.0 20.2 19.2 Inventories 3,981 4,496 4,786 5,762 6,453 Net profit (y-y%) 103.6 29.0 15.0 20.2 19.2 Other current assets 4,675 8,262 9,060 10,171 11,713 EPS (%) 103.6 29.0 15.0 20.2 19.2
Investment 2,292 2,178 2,178 2,178 2,178 Dividend payout (%) 72.2 3.2 40.0 40.0 40.0 Fixed assets 2,074 2,160 2,295 1,997 1,681 Other assets 20 33 39 50 60 Gross margin (%) 8.3 8.4 8.2 8.0 8.0 Total assets 16,074 20,296 22,106 24,538 27,042 Operating margin (%) 5.05.65.55.55.7 EBITDA margin (%) 7.6 7.5 7.4 7.1 7.1
S-T debt 115 192 66 79 80 Net margin (%) 5.9 5.7 5.5 5.2 5.2 A/C payables 2,154 3,096 3,619 4,648 5,577 Other current liabilities 7,737 10,376 10,676 10,976 11,276 ROA (%) 6.9 6.4 6.3 6.9 7.4 L-T debt 226 273 85 102 103 ROE (%) 17.9 19.8 19.7 20.2 21.0 Other liabilities 4 7 9 11 14 Net D/E (x) (0.1) (0.1) (0.2) (0.2) (0.1)
Total liabilities 10,236 13,944 14,454 15,816 17,049
Norm PE (x) 46.0 35.6 31.0 25.8 21.6 Minority interest 203 203 200 197 192 Norm PE at TP (x) 55.1 42.8 37.2 30.9 26.0 Shareholders' equity 5,635 6,148 7,451 8,525 9,801 PE (x) 46.0 35.6 31.0 25.8 21.6
EV/EBITDA (x) 36.5 27.3 22.8 18.6 15.5
Working capital 4,010 3,224 3,414 3,994 4,332 P/BV (x) 7.4 6.8 5.6 4.9 4.2 Total debt 341 464 150 181 182 Dividend yield (%) 1.6 0.1 1.3 1.6 1.8 Net debt (507) (879) (1,350) (1,319) (1,318) Free cash flow 3,035 4,227 866 864 1,500 BV/share (Bt) 4.8 5.2 6.3 7.2 8.3
Year End Shares (m) 1,186 1,186 1,186 1,186 1,186 DPS (Bt) 0.6 0.0 0.5 0.5 0.6
Sources: Company data, Thanachart estimates
Note: Net margin – using the profit after tax for calculation
THANACHART SECURITIES | DAIWA CAPITAL MARKETS 34
6 MARCH 2013 A d H oc R BUY (Unchanged) TP: Bt 51.00 (From: Bt 35.00) e se a rch Change in Numbers Upside: 35.1%
Thanachart
Securities
Toyo-Thai Corporation Pcl (TTCL TB)
Top AEC growth play
We raise our TP for TTCL a hefty 46% to Bt51.00/share as we were too conservative on it benefiting from economies of scale and its low inventory model boosting its cash flow stream. We also see its Myanmar power plant project lifting TTCL’s business scale and we expect more projects there in the near future. Reaffirm BUY. SAKSID PHADTHANANARAK 662 – 617 4900
TP upgraded to Bt51.00, reaffirm BUY [email protected]
We upgrade our earnings forecasts by 5-11% from 2013-15 for the following COMPANY VALUATION reasons. First, we revise up our new work value by 4.1-29% given that we see higher potential for more power plant and petrochemical construction Y/E Dec (Bt m) 2012A 2013F 2014F 2015F work in domestic and regional markets. TTCL’s potential bidding work value Sales 11,358 17,861 21,750 26,020 at present is raised to Bt95.1bn from Bt80.6bn. Second, even though we Net profit 546 867 1,129 1,335 keep TTCL’s gross margin at 10.5-10.8%, we lower our SG&A-to-sales ratios Consensus NP ⎯ 756 982 na to 5.0-5.5% in 2013F-15F from 5.6-6.0% previously due to its benefiting from Diff frm cons (%) ⎯ 14.6 14.9 na economies of scale. Third, our working capital assumptions of Bt1.3bn-1.5bn Norm profit 548 867 1,129 1,335 in 2013F-15F look too high. We cut working capital to Bt517m-727m in Prev. Norm profit ⎯ 827 1,073 1,200 2013F-15F versus Bt376m in 2012. As a result, our TP is lifted to Bt51.00 from Bt35.00. We reiterate our BUY call and TTCL is our top sector pick. Chg frm prev (%) ⎯ 4.7 5.2 11.2 Norm EPS (Bt) 1.1 1.8 2.4 2.8 One of the best AEC plays, in our view Norm EPS grw (%) 37.1 58.2 30.3 18.2 Although we see TTCL benefiting less from Thailand’s infrastructure Norm PE (x) 33.1 20.9 16.1 13.6
investments, we like it because: 1) we believe it’s the only EPC contractor in EV/EBITDA (x) 25.8 17.0 13.0 10.5 Thailand and one of a few medium-sized EPC contractors in Southeast Asia P/BV (x) 9.0 7.2 5.8 4.7 enjoying cost competitiveness from low engineering costs, 2) it has a low Div yield (%) 1.7 2.4 3.1 3.7 inventory model by sub-contracting almost all its civil work to local partners, ROE (%) 29.7 38.3 40.0 38.1 allowing it to have low working capital, less exposure to volatility in building Net D/E (%) (90.3) (47.9) (55.7) (62.0) material prices and a net cash position, and 3) TTCL also secures revenues by
investing in power projects it is awarded as an EPC contractor. It has a 25% PRICE PERFORMANCE
stake in the common shares of Siam Solar Power (SSP, unlisted), an 8MW (Bt/shr) (%) TTCL Rel to SET Index solar power plant, and 42% of the preferred shares of Navanakorn Electric 45 200 40 (unlisted), a 110MW power plant due to commence operations in 2Q13. 150 35 30 100 Myanmar plant on schedule, we expect more projects 25 50 Moreover, TTCL signed a memorandum of agreement (MOA) with the 20 0 Ministry of Electric Power in November 2012 to develop a 110MW power 15 10 (50) plant in Ahlone, Yangon. Currently, the first phase of construction with 35MW Mar-12 Jul-12 Nov-12 Mar-13
is still on schedule and TTCL expects to sign the power purchase agreement
(PPA) with the Myanmar government before the COD in April 2013. The COMPANY INFORMATION second phase with 35MW and the third phase with 40MW are scheduled to start their COD in June 2013 and late 3Q14. We see this as another step for Price as of 4-Mar-13 (Bt) 37.75 TTCL to become a power plant operator while the company hopes it will be a Market cap (US$ m) 578.5
pilot project for it to bid for other power projects in Myanmar. Listed shares (m shares) 480.0
Free float (%) 40.5 Attractive valuation, in our view Avg daily turnover (US$ m) 1.6 Our 12-month DCF-based SOTP TP of Bt51.00 per share is derived from our 12M price H/L (Bt) 40.8/13.3 estimate of TTCL’s fair construction business value of Bt44.50 and the Sector Construction investment value of Bt6.50 from its power plant investment portfolio. With a Major shareholder Toyo Engineering Corp 26% three-year EPS CAGR of 35% in 2012-15F, we see TTCL’s PE falling from Sources: Bloomberg, Company data, Thanachart estimates 20.9x in 2013F to 16.1x in 2014F and 13.6x in 2015F.
Please see the important notice on the back page.
6 MARCH 2013 Ad Hoc Research
Ex 1: Key Assumption Changes
2013F 2014F 2015F New work value (Bt m) - New 30,000 25,500 28,050
- Old 23,337 24,503 26,954
- Change (%) 28.6 4.1 4.1
Total sales (Bt m)
- New 17,861 21,750 26,020
- Old 17,623 21,276 24,063 - Change (%) 1.4 2.2 8.1
SG&A-to-sales ratio (%) - New 5.5 5.0 5.0 - Old 6.0 5.7 5.6 - Change (%) (0.5) (0.7) (0.6)
Net profit (Bt m) - New 867 1,129 1,335 - Old 827 1,073 1,200
- Change (%) 4.7 5.2 11.2
Working capital (Bt m) - New 517 618 727
- Old 1,265 1,353 1,530 - Change (%) (59.1) (54.3) (52.5) Source: Thanachart estimates
Ex 2: TTCL’s Major Shareholding Structure Ex 3: TTCL’s Board Of Directors
Chiyoda TTCL was established in 1985 and it has been in the EPC 7% Italian-Thai construction business for 27 years. TTCL’s board of directors 8% has seven members. Three are from Toyo Engineering (6330 JP, JPY439, Unrated), the third-largest EPC contractor in
Japan, Chiyoda (6366 JP, JPY1164, Unrated), the second- Toyo largest EPC contractor in Japan and Italian-Thai Development Engineering (ITD TB, Bt7.00, Unrated), the largest contractor in Thailand. Others 59% 26% Three other members are independent directors and one is the CEO, Mr. Hironobu Iriya.
Source: Company data Source: Company data
THANACHART SECURITIES | DAIWA CAPITAL MARKETS 36
6 MARCH 2013 Ad Hoc Research
Ex 4: TTCL’s Current Backlog
(Bt m) Backlog as of January 1, 2012 15,000
Ammonium nitrate plant in Vietnam 2,700 Chiyoda’s petrochemical plant in Thailand 2,400
Solar IPP Gebeng project in Malaysia 810
Siam Solar Power project in Thailand 600
Chlor-Alkali and CO2 capture plant project in the US 3,750
A 100MW power plant in Myanmar 4,800 Revenue recognition in 2012 (11,358)
Backlog as of 1 January 2013 18,702 A desalination plant in Qatar 6,300
A chemical plant 1,800 Value of contract realized during January-February 2013 (2,000)
Current backlog value as of 28 February 2013 24,802 Source: Company data
Ex 5: TTCL’s Potential Bid Proposals By Industry Ex 6: TTCL’s Potential Bid Proposals By Location
Utilities, Bt7,200m Overseas, Bt21,900m Petrochemical Bt20,400m
Pow er , Domestic , Bt67,500m Bt73,200m
Source: Company data Source: Company data
Ex 7: TTCL Offers The Highest ROE In The Sector
(%) TTCL CK STEC
100
80 60 40
20
0 (20) (40)
(60)
(80)
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12
Source: Company data
THANACHART SECURITIES | DAIWA CAPITAL MARKET 37
6 MARCH 2013 Ad Hoc Research
Ex 8: 12-month DCF-based SOTP TP Calculation Terminal (Bt m) 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F Value EBITDA 989 1,244 1,483 1,789 2,048 2,354 2,620 2,917 3,248 3,615 4,025 — Free cash flow 531 803 988 1,249 1,469 1,702 1,906 2,133 2,386 2,668 2,982 33,066
PV of free cash flow 530 650 719 817 864 900 906 912 918 923 927 10,282
Risk-free rate (%) 4.0 Market risk premium (%) 8.0 Beta 0.9
Wacc (%) 11.2 Terminal growth (%) 2.0
Enterprise value - add 19,348 investments Net debt (2,056) Minority interest 263 Equity value 21,141
# of shares 480 Equity value/share 44.0
Sum-of-the-parts % holding (Bt m) Enterprise value from construction business 19,348 Investment equity value 3,145 A 110MW power plant in Myanmar 60.00 2,159
Siam Solar Power 25.00 152
Navanakorn Electric 42.00 834 Total enterprise value 22,493 (Less) Net Debt (2,056)
(Less) Minority interest 263
Total enterprise value 24,286 # of shares (fully diluted) (m shares) 480 Sum-of-the-parts 51
Source: Thanachart estimates
We increase our 12-month DCF-based target price to Bt51 (from Bt35) due to the following reasons:
Increases to our new work value forecasts (4-29% over 2013-15)
Better economies of scale to improve operating profit margin
At our target price of Bt51, the shares of TTCL would be trading at an implied 2013F PER of 28x versus the industry average of 42x.
THANACHART SECURITIES | DAIWA CAPITAL MARKETS 38
6 MARCH 2013 Ad Hoc Research
COMPANY DESCRIPTION COMPANY RATING
Toyo-Thai Corporation Pcl (TTCL) was the first all-round Financial Rating Scale management engineering company in Thailand. It was incorporated in 1985 5 Very Strong 5 4 in JV between Italian-Thai Development Pcl, the biggest 3 Risk Strong 4 contractor in Thailand, and Toyo Engineering Corp, a leading Manage 2 manage ment 1 international engineering firm in Japan. TTCL is an integrated 0 ment Good 3 contractor providing integrated design and engineering, Fair 2 procurement of equipment and materials, and construction *Corp. Liquidity (integrated EPC) services for turnkey projects, mainly to the governance Weak 1 petrochemical, chemical and petroleum industries. None 0
Source: Thanachart Source: Thanachart; *CG Awards
THANACHART’S SWOT ANALYSIS
S — Strength W — Weakness
Specialized EPC contractor in this high-barriers-to- TTCL is only qualified to bid for projects with a value of
entry market. below US$500m.
Strong finances in our view and in a net cash position. TTCL is focusing on engineering work. Thus, there is a risk from engineer shortages. Strong support from major shareholders, such as Toyo Engineering and Chiyoda, which are international EPC
contractors.
O — Opportunity T — Threat
TTCL’s exposure to overseas work boosts its chances Political instability in foreign countries.
of enjoying the AEC investment boom story, in our Global economic volatility and the down cycle of the view. petrochemical industry could cause delays to new
The increasing need for infrastructure development to investments.
fuel economic growth in Southeast Asian countries.
CONSENSUS COMPARISON RISKS TO OUR INVESTMENT CASE
Consensus Thanachart Diff
Given that the petrochemical industry is cyclical and Target price (Bt) 35.74 51.00 43% highly dependent on global economic fluctuations, Net profit 13F (Bt m) 756 867 15% delays to new investments in the sector would have a Net profit 14F (Bt m) 982 1,129 15% significant impact on TTCL’s future backlog. Consensus REC BUY: 4 HOLD: 3 SELL: 2 We believe TTCL’s core value lies with its experienced
HOW ARE WE DIFFERENT FROM THE STREET? engineers who can work on design and engineering
work. Movement of these engineers to other countries Our net profit forecast is above the consensus as we with the AEC’s launch in 2015 could have a significant are more bullish on the company’s new work value and impact on its operation.
ability to sustain gross margin.
Our TP is also higher than the Street’s following our
higher earnings forecasts.
Sources: Bloomberg consensus, Thanachart estimates Source: Thanachart
THANACHART SECURITIES | DAIWA CAPITAL MARKETS 39
6 MARCH 2013 Ad Hoc Research
FINANCIAL SUMMARY
Income Statement (consolidated) Quarterly Earnings (consolidated)
FY ending Dec (Bt m) 2011A 2012A 2013F 2014F 2015F 4Q11 1Q12 2Q12 3Q12 4Q12 Sales 8,896 11,358 17,861 21,750 26,020 Sales 3,648 2,159 2,287 3,751 3,161
Cost of sales 7,853 10,083 15,933 19,467 23,288 Cost of sales 3,305 1,858 2,111 3,387 2,727
Gross profit 1,043 1,276 1,928 2,284 2,732 Gross profit 342 301 176 365 433 SG&A 577 677 982 1,088 1,301 SG&A 175 172 106 185 215 Operating profit 466 598 946 1,196 1,431 Operating profit 168 129 71 180 218 Depre & amortization 22 24 44 48 52 Depre & amortization 5 6 6 6 6
EBITDA 488 622 989 1,244 1,483 EBITDA 173 135 77 186 224
Other income 99 162 180 215 215 Other income 40 20 35 12 94 Other expenses 00000Other expenses00000 Interest expense 0 0 (0) (0) (0) Interest expense 0 0 0 0 0 Pre-tax profit 565 760 1,126 1,411 1,646 Pre-tax profit 208 149 106 192 313
Income tax 160 214 259 282 329 Income tax 69 38 27 49 99 After-tax profit 405 546 867 1,129 1,317 After-tax profit 139 111 78 143 214 Equity income (1) 1 0 0 18 Equity income (1) (1) (1) 8 (5) Minority interests (4) (0) (0) (0) (0) Minority interests 3 1 0 0 (2) Extraordinary items 0 (2) 0 0 0 Extraordinary items 0 0 0 0 (2)
NET PROFIT 399 546 867 1,129 1,335 NET PROFIT 141 111 78 151 205 Normalized profit 399 548 867 1,129 1,335 Normalized profit 141 111 78 151 207
EPS (Bt) 0.8 1.1 1.8 2.4 2.8 EPS (Bt) 0.3 0.2 0.2 0.3 0.4
Normalized EPS (Bt) 0.8 1.1 1.8 2.4 2.8 Normalized EPS (Bt) 0.3 0.2 0.2 0.3 0.4
Balance Sheet (consolidated) Financial Ratios And Valuations FY ending Dec (Bt m) 2011A 2012A 2013F 2014F 2015F 2011A 2012A 2013F 2014F 2015F
Cash & equivalent 2,441 2,056 1,330 1,897 2,556 Norm profit (y-y%) 18.5 37.1 58.2 30.3 18.2 A/C receivables 1,821 1,523 1,957 2,384 2,852 Normalized EPS (%) 18.5 37.1 58.2 30.3 18.2 Inventories 61 67 87 101 108 Net profit (y-y%) 18.5 36.6 58.8 30.3 18.2 Other current assets 1,774 2,043 2,750 2,750 2,750 EPS (%) 18.5 36.6 58.8 30.3 18.2
Investment 0 61 61 61 61 Dividend payout (%) 51.7 56.3 50.0 50.0 50.0 Fixed assets 187 970 1,026 1,078 1,126 Other assets 619 896 1,500 1,500 1,500 Gross margin (%) 11.7 11.2 10.8 10.5 10.5 Total assets 6,904 7,615 8,711 9,770 10,953 Operating margin (%) 5.25.35.35.55.5 EBITDA margin (%) 5.5 5.5 5.5 5.7 5.7
S-T debt 00000Net margin (%)4.54.84.95.25.1 A/C payables 818 1,213 1,528 1,867 2,233 Other current liabilities 4,191 3,893 4,044 4,055 4,065 ROA (%) 7.5 7.5 10.6 12.2 12.9 L-T debt 00000ROE (%) 25.029.738.340.038.1 Other liabilities 212 232 365 444 532 Net D/E (x) (1.5) (0.9) (0.5) (0.6) (0.6)
Total liabilities 5,221 5,338 5,937 6,366 6,830
Norm PE (x) 45.4 33.1 20.9 16.1 13.6 Minority interest 12 263 264 264 264 Norm PE at TP (x) 61.3 44.7 28.3 21.7 18.3 Shareholders' equity 1,670 2,014 2,510 3,140 3,859 PE (x) 45.4 33.2 20.9 16.1 13.6
EV/EBITDA (x) 32.2 25.8 17.0 13.0 10.5
Working capital 1,064 376 517 618 727 P/BV (x) 10.8 9.0 7.2 5.8 4.7 Total debt 00000Dividend yield (%) 1.1 1.7 2.4 3.1 3.7 Net debt (2,441) (2,056) (1,329) (1,896) (2,556) Free cash flow 1,836 (282) 126 986 1,188 BV/share (Bt) 3.5 4.2 5.2 6.5 8.0
Year End Shares (m) 480 480 480 480 480 DPS (Bt) 0.4 0.6 0.9 1.2 1.4
Sources: Company data, Thanachart estimates
Note: Net margin – using the profit after tax for calculation
THANACHART SECURITIES | DAIWA CAPITAL MARKETS 40
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Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.
Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action . The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.
For stocks in Thailand covered by Thanachart Securities, the following rating system is in effect: Ratings are based on absolute upside or downside, which is the difference between the target price and the current market price. If the upside is 10% or more, the rating is BUY. If the downside is 10% or more, the rating is SELL. For stocks where the upside or downside is less than 10%, the rating is HOLD. Unless otherwise specified, these ratings are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on the market price and the formal rating.
For the sector, Thanachart looks at two areas, ie, the sector outlook and the sector weighting. For the sector outlook, an arrow pointing up, or the word “Positive”, is used when Thanachart sees the industry trend improving. An arrow pointing down, or the word “Negative”, is used when Thanachart sees the industry trend deteriorating. A double-tipped horizontal arrow, or the word “Unchanged”, is used when the industry trend does not look as if it will alter. The industry trend view is Thanachart’s top-down perspective on the industry rather than a bottom-up interpretation from the stocks that Thanachart covers. An “Overweight” sector weighting is used when Thanachart has BUYs on majority of the stocks under its coverage by market cap. “Underweight” is used when Thanachart has SELLs on majority of the stocks it covers by market cap. “Neutral” is used when there are relatively equal weightings of BUYs and SELLs].
Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action .
Investment Banking Relationships For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action .
Relevant Relationships (TNS) TNS may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.
TNS market making TNS may from time to time make a market in securities covered by this research.
Additional information may be available upon request.
THANACHART SECURITIES | DAIWA CAPITAL MARKETS 23
DISCLAIMER
Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)
If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. In some cases, we may also charge a maximum of ¥2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements. There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.
When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.
Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Investment Advisers Association Type II Financial Instruments Firms Association
Thanachart Securities Pcl. Research Team 28 Floor, Siam Tower Unit A1 989 Rama 1, Pathumwan Road, Bangkok 10330, Thailand Tel: 662 - 617 4900 Email: [email protected]
Pimpaka Nichgaroon, CFA Supanna Suwankird Siriporn Arunothai Head of Research Energy, Utilities Ad Hoc Research, Healthcare Economics & Strategy [email protected] [email protected] [email protected]
Sarachada Sornsong Saksid Phadthananarak Noppadol Pririyawut Banks, Telecom Construction, Electronics, Transportation Senior Technical Analyst [email protected] [email protected] [email protected]
Phannarai Tiyapittayarut Kalvalee Thongsomaung Adisak Phupiphathirungul, CFA Property, Retail Food, Hotel, Media Retail Market Strategy [email protected] [email protected] [email protected]
Warayut Luangmettakul, CFA Assistant Analyst [email protected]
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